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Calpers approves HMO fee hikes, says reform needed

By Kevin Krolicki

LOS ANGELES, June 18 (Reuters) - Calpers, the nation's third-largest purchaser of health care, on Wednesday approved a rate hike of up to 18 percent for members insured by health maintenance organizations, a rise it said underscored the urgent need to rein in spiraling medical costs.

California's massive public retirement system is closely watched as a trend-setter because of its size, so the rise in premium payments pointed to a continued inflationary spiral in U.S. health care costs.

"Clearly there is something wrong. It's got to be fixed and a lot of this is beyond our control," said Sidney Abrams, chairman of Calpers' health benefits committee. He added that some studies showed the quality of U.S. health care remains well below the rest of the developed world despite the ever-increasing amounts that are spent on it.

The contracts for 2004, which Calpers' board approved by a 7-5 vote, also raised the amount that members will pay for emergency room visits and for prescriptions outside a list of preferred drugs maintained by the HMOs.

The basic premium increases, which will average between 16.7 percent and 18.4 percent, were far below the more than 30 percent increase that HMOs had initially sought from the California Public Employees' Retirement System.

But the rate hikes followed a 25-percent premium increase for 2003 for most of the 1.2 million state workers and retirees represented by Calpers, which also ranks as the nation's largest public pension system.

California cities, counties and public agencies have 60 days to decide whether to opt out of the the contracts that Calpers has negotiated with its two major HMOs: Blue Shield of California and Kaiser Permanente, both non-profits. Some may withdraw from the Calpers plan in hopes of negotiating a better deal based on local cost structures.

Any such defections -- especially by municipalities in Southern California, where health care costs are lower than they are in the San Francisco Bay area -- could undercut Calpers' leverage in the next round of health care negotiations for 2005.

NO LONGER IN CONTROL

But Abrams said Calpers hoped to fend off defections and keep the state-wide system intact so it can secure better deals for its members by forging a broad alliance with California labor groups and private employers.

"We have become painfully aware that -- big as we are -- we do not control the marketplace at this point," said Abrams.

In the 1990s, Calpers was able to restrain medical care cost increases but the market has been tipped against it by stronger hospital chains and HMOs that are more focused on bottom-line profit than membership, Abrams said.

Last year, HMOs operated by PacifiCare Health Systems and Health Net Inc. dropped out of the Calpers bidding process rather than accept lower premium increases.

"What this says for purchasers generally is that we are not seeing an abatement in the staggering rate of increases in health care costs," said Peter Lee, the head of the Pacific Business Group on Health, which represents businesses on health care issues.

Calpers has a 2003 health care budget of $3.4 billion, which puts it behind only the federal government and General Motors Corp. as a purchaser of employee health benefits.

Western Health Advantage operates a regional HMO for Calpers based in Sacramento. Blue Cross of California, a unit of WellPoint Health Networks Inc. , administers a preferred provider plan for the agency.

California's major hospital chains include Tenet Healthcare Corp. and HCA Inc. .

Calpers has mounted a major effort to link payments to the quality of care, and Lee said one reform it would likely back would aim to force such operators to allow individual hospitals to be paid differently, depending on how they performed in specialties such as cardiac surgery or hip replacements.

"I think it's important that we have one of the largest purchasers in the country recognizing that they alone are not enough," he said. "Right now we have a health care market that is dysfunctional."